The Ultimate Small Business Tax Deductions Checklist

Whether you operate a sole proprietorship, LLC, startup, or you're self-employed, you have at least one thing in common with your competition: no one wants to pay more than they should in taxes. While paying taxes is usually inescapable, numerous strategies are available to minimize your business tax burden, including taking every deduction you're eligible for.As you handle your taxes, you'll discover that the law provides many opportunities to adjust and reduce your tax burden. Use this guide to learn about deductions that may apply to your business, including tax deductions associated with labor, office costs, marketing and advertising, and organizational expenses.

What Expenses Can Small Business Owners Deduct?

As a small business owner, you know that it costs money to make money. Fortunately, many of those everyday costs are not meant to be included in your taxable income. That's what it means for your business expenses to be tax-deductible.Business expenses represent the cost of carrying on a trade or business, and these expenses are usually deductible if your business operates to make a profit. Deducting business expenses is only possible if the expenses are ordinary and necessary for your business's operation.Your expenses must be relatively normal in your industry and clearly supportive of your for-profit business's fundamental operation. You also need adequate supporting documents and accounting records to provide evidence for the expense itself and its purpose.Keeping up with business expenses can be difficult without detailed record-keeping. Schedule a call today to see how our professional bookkeeping solution can help your business stay organized.

Small Business Tax Deductions Checklist

Tax deductions reduce your taxable income and lower your overall business taxes. Essentially, they exempt portions of your income from being taxed. Use this small business tax deductions checklist to determine what you could claim for your small business. 

Start-up and Organizational Expenses

Most, if not all, of your start-up costs will be eligible for deduction as business expenses. This includes the cost of setting up your business entity and filing with state and federal authorities. Any expenses associated with starting the business before it is in operation are included here.This includes equipment, hiring costs, and even the software you buy to use in your accounting system.

Labor Costs

Paying your employees is one of the necessary and ordinary costs associated with running your business. Your payroll and contract labor costs, including administrative expenses, should be tax-deductible.If you reimburse your employees separately for expenses they make on behalf of the business (via a personal credit card or cash), these may also be claimed as tax-deductible expenses.Do you have W-2 employees, or are you considering hiring some? Schedule time to learn about our payroll solutions for your small business.

Operating Expenses

Capital and supply costs, including significant expenses like new buildings or equipment and smaller costs like raw materials and ongoing maintenance needs, can be recorded and claimed as business expenses.What was the cost to you for every good you sell? That cost of the good was an investment you made, so that portion of the selling price should not be counted as income on your tax return.

Advertising and Marketing

Advertising and marketing are crucial to attracting clients and establishing your business in your industry. Therefore, most advertising and marketing costs can be claimed as tax-deductible expenses.Business advertising expenses are deductible as long as they only serve an advertising purpose instead of a personal purpose. For example, you can't deduct the costs of personal events just by inviting prospective customers along for the ride. Buying signs or other materials for advertising purposes also may not count as an advertising expense. However, if you are buying something for advertising, it is an asset you have purchased. You can still deduct the cost of that asset over time as it depreciates.

Building Costs

Rent, utilities, and other costs associated with maintaining your office should also be eligible for claiming as tax deductions. If the space is used solely and explicitly for business purposes, it all counts as a business expense.This can also include telephone and internet costs and anything else related to the building necessary for your work.

Depreciation

When you purchase property or make relatively large investments in your business, you can't deduct the whole cost of the investment immediately. What you can do, however, is claim deductions for depreciation over time.When you claim a deduction to depreciate property, you ask for a tax deduction to compensate for the loss of value over time. Your capital or property investment slowly degrades, so you claim a tax deduction for that slow degradation from your original investment.

Professional Fees

If you've utilized the services of a lawyer for legal services, an accountant for tax preparation, or other professional, those fees are usually tax-deductible because they are a normal part of doing business.This also applies to fees you may pay for membership in certain professional networks or organizations. Those costs should be tax-deductible if your membership or subscription is entirely used for business purposes.

Business Travel and Transportation

Business travel is defined as any travel outside of your home city for an entire day or more intended entirely for business purposes. You should be able to deduct all business travel expenses that meet these requirements.Keep detailed records of the money you spend on transportation, tolls, lodging, business meals, parking, and even tips. These are all deductible business travel expenses. 

Vehicle Use

If you use your vehicle for business and personal transportation, you should be able to claim a tax deduction for any vehicle used for business purposes.The simplest way to do this is to document and record your precise mileage when using the vehicle for business purposes. Once you establish the standard mileage rate, you will claim a deduction based on your recorded mileage for business use of your personal vehicle. This excludes travel to and from your office and residence.

Home Office Deduction

If you run your business out of your home, you might be able to deduct a portion of your housing costs as business expenses. However, to qualify for reimbursement, you must have an accountable plan.It would be best if you had an area of your home explicitly designated for business purposes only. The home office deduction will then allow you to deduct a portion of your rent, utilities, mortgage, and other housing-related costs corresponding to the portion of your home used for your business.  Other personal properties you make use of for business purposes may also qualify. The office space must be your principal and regular place of work, and you should be able to support your claim with clear documentation, including its square feet.

Education Costs

The world changes rapidly, and businesses that keep learning have the best chance to survive and adapt. Attending professional conferences and seminars and continually educating oneself about industry changes are important and necessary for running an efficient business. Costs associated with continuing education are deductible.

Insurance, Taxes, Licenses, and Permits

Insurance, taxes, licenses, and permits are ordinary and necessary costs of doing business. If your business has to pay to renew a license to operate regularly, that should qualify. Business insurance premiums and normal taxes paid by your business may be costs you can deduct on your federal income tax return.  Deductible insurance costs include business insurance policies on your equipment and property and the costs you pay to cover your employees' insurance policies.

Banking Costs

You have to maintain a bank account to run your business, so any costs associated with that account are deductible business expenses. 

Interest from a bank account or business loan is also tax-deductible, although it must be clearly meant for business purposes. The IRS also tends to be critical of loan agreements between individuals with a personal connection that goes beyond commercial ties.

Qualified Business Income Deductions

The qualified business income deduction is available to eligible business owners beginning after December 31st, 2017, and concluding on or before December 31st, 2025.It allows you to deduct up to 20% of your qualified business income, 20% of qualified real estate investment trust dividends, and 20% of qualified publicly traded partnership income.

Charitable Donations

Typically, you can deduct up to 60% of the cash value of your charitable contributions. The charities you donate to must be recognized by the IRS to qualify, so ask about their 501(c)(3) status before donating.Your deductions must be itemized to qualify. 

Bad Debts

Bad debts are uncollectible and will remain unpaid for many reasons, including disputes and business closings.The IRS understands this is a normal part of doing business and allows you to deduct 100% of qualifying bad business debts.  

Other Tax Deductions

Additional deductions that aren't as common may be available to your small business. Speak to a tax professional familiar with your state and industry to help you identify additional money-saving small business tax deductions. 

Conclusion: Don’t Leave Money Behind with Our Small Business Tax Deductions Checklist